Exam 20: Mergers and Acquisitions and Financial Distress

Market-specific reasons for financial distress include all of the following except _________.

Which of the following is NOT a tax consideration motive for a merger?

Calculation of Average Costs with Economies of Scope Baby Supplies is considering a merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a sales volume (J_P) of $975,000.For a sales volume of $3.125 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 19.5%.

Which of the following is a voluntary liquidation proceeding that passes the liquidation of the firm's assets to a third party that is designated as the assignee or trustee?

The main reason for a vertical merger is _________________.

Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = .35, X₂ = Retained earnings/Total assets = .50, X₃ = Earnings before interest and taxes/Total assets = .60, X₄ = Market value of equity/Book value of long-term debt = 1.50, X₅ = Sales/Total assets ratio = 3.65. Calculate the Altman's Z-score for this firm.

A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $500,000 after the merger, what will the average cost be for the new firm?

Stubborn Motors, Inc., is asking a price of $10.5 million to be purchased by Rubber Tire Motor Corp. Rubber Tire currently has total cash flows of $6 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first four years following the merger. After the first four years, incremental cash flows will grow at a rate of 3 percent annually. The WACC for the merged firms is 9.75 percent. Calculate the NPV of the merger. Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $10.5 million?

Cindy's Computer Corp. is considering a merger with Bobby's Hard Drive, Inc. Cindy's total operating costs of producing services are $2.1 million for a sales volume (S_C) of $13 million. Bobby's total operating costs of producing services are $2.5 million for a sales volume (S_B) of $7 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.

George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores. George's total operating costs of producing services are $790,000 for sales volume (S_G) of $4.7 million. Weezzie's total operating costs of producing services are $202,000 for a sales volume (S_W) of $2.3 million. For a sales volume of $7 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 12%.

Which of the following is a poor justification for a merger?

Calculation of Average Costs with Economies of Scope Dee's Dry Cleaning is considering a merger with Larry's Laundry Supply Stores. Dee's total operating costs of producing services are $600,000 for sales volume of $4 million. Larry's total operating costs of producing services are $200,000 for a sales volume (J_P) of $1 million. Calculate the average cost of production for the Dee's and Larry's firms, respectively.

Economies of Scope A survey of a national market has provided the following average cost data: Jackson County Construction (JCC) has assets of $2 million and an average cost of 30 percent. Arkansas Architects (AA) has assets of $1.5 million and an average cost of 20 percent. Colorado Home Builders (CHB) has assets of $500,000 and an average cost of 10 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $200,000 after the merger, what will the average cost be for the new firm?

Calculation of Average Costs with Economies of Scope Jan's Bakery is considering a merger with Tina's Cookies. Jan's total operating costs of producing services are $300,000 for a sales volume of $2 million. Tina's total operating costs of producing services are $75,000 for a sales volume of $600,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

Peter's TV Supplies is considering a merger with Jan's Radio Supply Stores. Peter's total operating costs of producing services are $330,000 for a sales volume (S_P) of $4.5 million. Jan's total operating costs of producing services are $30,000 for a sales volume (S_J) of $550,000. Suppose that synergies in the production process result in a cost of production for the merged firms totaling $360,000 for a sales volume of $5,050,000. Calculate the total average cost (TAC) for the merged firm.

If Whole Foods grocery store buys Whole Wheat Bread, this would be an example of a ___________.

Why is NPV valuation an appropriate tool to use in the evaluation of a merger target?

Economies of Scope A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average cost of 15 percent. Anderson Architects (AA) has assets of $8 million and an average cost of 20 percent. Cole Home Builders (CHB) has assets of $8 million and an average cost of 17 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $300,000 after the merger, what will the average cost be for the new firm?

Calculation of Average Costs with Economies of Scope Crib World is considering a merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000 for a sales volume (J_P) of $900,000. For a sales volume of $2.15 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 17.5%.

Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = .25 (debt ratio) + .12 (profit margin) A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent. Calculate the firm's expected probability of default, or bankruptcy.